As the year comes to a close, many investors are taking stock of their investment portfolios and thinking about taxes. While not the most exciting combination, it is one that can make a meaningful impact on your bottom line. Tax-loss harvesting is a strategy in which you sell investments at a loss to offset taxable gains elsewhere, potentially reducing your tax liability. In this blog you will find straightforward steps to approach tax-loss harvesting effectively, common pitfalls that can undermine the benefits of this strategy, and an explanation of when it makes sense to partner with a professional for guidance.
What Is Tax-Loss Harvesting
Tax-loss harvesting is a tax-smart investing strategy that involves selling an investment at a loss to help offset taxes owed on other investment gains. To understand how it works, it helps to know a few basic terms.
- Capital gains occur when you sell an investment for more than you paid.
- Short-term gains come from assets held less than a year and are typically taxed at higher rates
- Long-term gains apply to assets held longer than a year.
Gains or losses only matter for taxes once they are realized through a sale, and—until then—they remain unrealized on paper. Ultimately, tax-loss harvesting is not about picking winners or losers; it is about timing your sales to strategically impact your year-end tax planning.
Who Should Consider Tax-Loss Harvesting?
Investors who realized gains this year from selling stocks, mutual funds, or ETFs may benefit from strategies that help offset those taxable profits. This approach can also be valuable for anyone rebalancing a portfolio or holding underperforming positions that are no longer worth keeping. Households anticipating higher income from bonuses or business windfalls may find additional tax advantages in managing gains proactively.
Fair warning, this strategy might not be ideal for everyone. An example being long-term investors who have no realized gains, as they most likely will see limited benefit from harvesting losses.
The 3 Big Benefits of Tax-Loss Harvesting
- Harvested losses can offset capital gains, reducing the tax owed on profitable sales which is a direct and often meaningful benefit for active investors.
- If your losses exceed your gains, you can use a limited portion each year—up to $3,000 per year ($1,500 if married filing separately)—to offset ordinary income, with any remaining amount carried forward. This can help smooth taxes over time, especially for households with variable earnings.
- Unused losses can be carried into future years, creating long-term value for anyone who invests regularly. For example, an investor who sells a struggling stock at a loss in December might use that loss to offset gains from trimming a winning position, lowering this year’s tax bill and preserving extra losses for the future.
A Simple Year-End Tax Planning Process (Step-by-Step)
Step 1: Pull your year-to-date realized gains and losses.
Begin by reviewing your brokerage’s “realized gain/loss” report or the tax documents section to understand what you have already locked in this year. This snapshot shows the gains that may need offsetting and any losses you have already realized, giving you a clear baseline before making further moves.
Step 2: Identify positions with unrealized losses.
Next, scan your portfolio for investments currently showing losses. Distinguish between positions that no longer align with your strategy and those that remain part of your long-term plan but are simply down temporarily.
Step 3: Decide what to sell and why.
With that list in hand, determine which positions make sense to sell. Focus on losses that can be harvested without materially altering your risk exposure or undermining your investment strategy. The goal is to improve tax efficiency, not reshape your portfolio.
Step 4: Coordinate timing before year-end.
Be mindful of timing requirements. Trades must be executed before year-end to apply the resulting losses to that tax year, so avoid leaving decisions until the final days of December. Give yourself enough time to ensure trades settle as expected.
Step 5: Document your plan.
Finally, keep a brief record of what you sold, the reasoning behind each sale, and any replacement investments you plan to use. This documentation helps maintain consistency, supports future tax planning, and ensures clarity when reviewing your strategy later.
Important Consideration: The Wash-Sale Rule
The IRS wash-sale rule prohibits claiming a loss if the investor buys a “substantially identical” investment within 30 days before or after the sale.
Common Tax-Loss Harvesting Mistakes That Cost People Money
Several common mistakes can erode the benefits of tax-loss harvesting if you are not careful. One of the biggest is harvesting losses without first reviewing your realized gains, which can result in selling too much or too little and missing the intended tax outcome.
Another frequent error is making sales that unintentionally shift your portfolio’s risk profile or create new concentrations. Investors also overlook late-year mutual fund capital gain distributions, which can add unexpected taxable income and change how much loss they truly need. Some individuals overcomplicate the process or fall into panic-selling during market volatility, undermining long-term strategy for short-term tax goals.
Finally, since taxes are calculated at the household level, failing to coordinate with a spouse or across multiple accounts can lead to an incomplete or misaligned plan.
Situations Where You Should Seek a Qualified CPA Firm
There are certain situations that make professional guidance from an expert CPA firm especially valuable when considering tax-loss harvesting. If you have realized large gains from a business sale, concentrated stock position, or activity in RSUs or ESPPs, a tax professional can help optimize the outcome. Complexity also increases when you have multiple brokerages, a mix of taxable and retirement accounts, or complicated cost basis calculations. Prior-year carryforward losses add another layer that requires careful tracking. Finally, if you are actively planning other tax moves, such as charitable giving, Roth conversions, or managing Q4 business income, coordinating these strategies with tax-loss harvesting can maximize benefits and reduce unintended consequences.
Quick-Year-End Checklist
☐ Download realized gain/loss report
☐ List top unrealized loss positions
☐ Confirm your goals (offset capital gains, reduce income, rebalance portfolio)
☐ Review impact on overall portfolio risk
☐ Execute trades before year-end
☐ Save trade confirmations and summary
☐ Share information with your tax preparer
Even a small tax-loss harvesting move can make a meaningful difference to your year-end tax bill. If you have sold investments this year or expect capital gains, now is the time to review your tax picture before December 31. Schedule a year-end planning session today to explore your options and make the most of your investment strategy.
About Community CPA
At Community CPA, our goal is to help entrepreneurs build resilient, financially healthy businesses. If you are exploring grants or preparing an application, we are here to support you with guidance on tax implications, documentation, and long-term planning. Schedule an appointment with a tax and accounting expert on our team and leave no financial opportunity uncovered.
